[li]This week our portfolio was up by 89 pips, 3 trades out of five were profitable, and our basket earned nearly $120 on interest.[/li][li] The most profitable trade was the long position we took in the AUDUSD. During this week, the Australian dollar appreciated 87 pips against the US dollar, cruising from 0.8492 to 0.8579 in just five days. The only loss was taken in the Swiss franc with a 34 pips dive.[/ul][/li]
We are optimistic for the week ahead and no changes were done in the assets of the dynamic carry trade basket.
"$80 oil is now in focus and as long as prices continue to climb, the central banks of these respective countries have no choice but to leave interest rates at their currently lofty levels, keeping demand for carry trades intact". Click here for more
[B]What Are We Currently Long?[/B]
[B]Changes Since last week[/B]
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In an ever changing world, making profitable carry trades* (definition below) are not as easy as they use to be. Therefore we have created a dynamic carry basket that changes when the monetary policy outlook for a central bank changes or if there is significant event risk ahead. Follow the performance of the DailyFX Dynamic Carry Trade Basket
[B]What is Carry Trade[/B]
All that is needed to understand the carry trade concept is a basic knowledge of foreign exchange and interest rates differentials. Money shifts from around the world in seek of the highest yield and the benefit of trading currencies is that you are dealing with countries that have interest rates, which are charged or received every single day. If you are positioned on the side of positive carry, you have the right to earn that interest, which can be quite lucrative over time.
Substantial gains made from interest rate differentials provide undeniable evidence that the carry trade strategy has been very successful over the past few years. Still, this strategy involves significant risks and an adequate protective stop is required. We are using a protective stop-loss equivalent to five times the average true range.
Our position size varies according to each currency volatility. Generally, the more volatile the currency is, the fewer lots we trade. For example, let’s assume you have $10,000 and you are trading 10K lots, you decide to limit your risk per trade to 3% or $300 and the 90 days average true range for the EURUSD is 100 pips. In this case, if you go long EUR/USD you could buy 3 lots, since ($10000 * 3%) divided by (0.0100*10K) = 3 lots. In case the final result is not an integer you should always rounded it down to limit your exposure.